CHALLENGE
A German drug manufacturer had its registered representative office in Russia for many years. The representative office was officially a subsidiary of the German legal entity, but was not entitled to conduct operative business activities on its behalf, and thus could not generate revenues. The representative office’s tasks solely related to marketing, market research, and support functions. In order to resolve this problem, the German manufacturer established an additional local subsidiary as an LLC (OOO; similar to a German GmbH). The commercial activities were then performed by the LLC, however operative business was still partly performed by the representative office. This double structure was cost intensive and created difficulties in the intra-company transfer of cost related to taxation and accounting.
SOLUTION
SCHNEIDER GROUP’s initial task was a simulated tax audit in order to identify the risks in tax accounting and determine the outcome of a genuine audit carried out by the tax authorities. The result of the simulated audit showed that since the commercial activities were solely carried out via the LLC, the representative office and its involvement in operative business created certain risks related to employees, as well as tax risks and other discrepancies. Due to the previous business it was decided to keep the representative office running at a minimum, but gradually de-register and liquidate it in the future, settling all open questions with the suppliers, clients, and authorities. All employees were transferred to the LLC. In order to reduce the costs of the representative office during its inactive state, it was decided to appoint a SCHNEIDER GROUP General Director to the representative office on a part-time agreement within the scope of SCHNEIDER GROUP´s Interim Management Service – a cost effective and beneficial solution to only have a professional on site when required. All tasks were centrally coordinated by the General Director, including inquiries from business partners and state authorities, internal communication and coordination, and financial planning of cash flows, thus keeping the representative office officially running and avoiding issues with the tax authorities.
RESULT
The entire operative business was transferred to the local LLC, which was able to independently develop further. This came with great advantages in the tax deductibility of costs, especially regarding VAT. The German Head Office clearly benefitted from SCHNEIDER GROUP´s Interim Management, eventually saving costs and time not having to handle the complex and lengthy liquidation process. The outsourced General Director of the representative office saved the client labor costs and lead to a lean process in management and preparation during the idle liquidation phase of the office in Russia. While the representative office was officially still in operation, the client did not have significant expenses and avoided potential conflicts with the tax authorities. Until this process is completed, SCHNEIDER GROUP will keep maintaining our client’s representative office. Since the restructuring, the German drug manufacturer and its LLC have successfully been doing business in Russia.